Greek debt world wide

An editorial in this week’s The Economist calls for Greece’s official creditors to write off a big chunk of the Greek debt so that country can start over again.

Debt is not a problem restricted to Greece.  It is a problem for most of the countries around the world.

So much debt, government and consumer, has been for projects that will not earn the income with which to repay the debt.  There is little hope  any of this debt will ever be repaid and therefore it will eventually have to be written off or defaulted.

The down side of this is that a lot of people are going to lose their savings.

Once the big crash happens I hope the survivors will be smart enough to find a way of creating money that is not based on debt.

 

Greek exit loses

This report from the Huffington Post puts a figure onto my analysis of a Greek exit from the Euro. It suggests Greeks would lose at least half their income.

Don’t be surprised if that happens whether or not they leave the Euro because what really counts is what is happening in the physical or real side of the economy.

Conseqences of Greece leaving the Euro

It appears a Greek departure from the Euro would be a surprise to the Greeks but not to everyone else.  If it does happen what would be the impact on them and the rest of us?

As I believe economic problems should be analyzed in terms of the physical side of the economy lets start there and then look at financial concerns.

Following an exit from the Euro the Greek standard of living would depend upon the quantity of goods and services the Greek people would be able to produce divided by the number of people.   This does not mean they would have to be self-sufficient as they would still be able to trade.

There could be a problem. If they were currently producing enough for their desired standard of living they probably would not now be in a crisis.

There are a number of factors which might reduce or improve their standard of living.

Some of the outside money they have been receiving was probably  used to import goods and services.  This would probably be lost although if things are really tough they might be given some aid.

If there were to be massive emigration (not a sure thing) things would be better.

The standard of living could be reduced by an obligation to repay some of the current debt to foreigners.  This would be because money repayments would be followed by goods and services.

They would also be adversely affected by what happens in other countries.  If things get worse elsewhere the number of tourists could drop which would reduce the foreign money they have for outside purchases.

On the financial side it appears there will be a massive write off of debt which means a lot of people will lose a lot of purchasing power.  A lot of people will be a lot less rich than they thought.  Both in and out of Greece this will fall upon individuals in the form of lost or devalued pensions or investments.

The writing off of debt will also mean a loss of money supply both in and out of Greece.  As there appears to be a lot of unused credit around this might not be too serious a problem

If Greece leaves the Euro its government will have to manage the replacement money and will have to be very careful not to create too much.  The consequences of too much money is inflation, maybe even hyperinflation.   Inflation is a loss of purchasing power just like the writing off of debt.  It can be a sneaky way for governments to steal from their people.

If I were a Greek politician I would want to write off all debt and start over with a national exchange trading system as outlined in my essay “LETS go to market”>

In working on this post I am very grateful I was born and raised in Western Canada.  However, I have to recognize our turns is probably coming soon.

In denial about the economic crisis

How do you communicate with people who are in denial.

The question was raised while reading this article that suggests a lot of Greek people believe they will never leave the Euro zone.

The question also applies to a lot of economists, most of the world’s seven billion people and politicians  –  although politicians have an excuse.  They won’t be reelected if they try to tell people they will have to accept a lower standard of living.

The economic  crisis is not just a Greek or European problem, it is a world-wide problem.  The rest of us will probably have our turn soon.

I believe there are things we could do to reduce the impact but so long as so many people are in denial, there is little hope.

Debt bondage slavery

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

Slavery was a part of life in ancient Greece.   One of the ways to become a slave is to become a debtor and not be able to repay your debts.  This is one reason one should not become a borrower.  (It is not clear to me that debt bondage was common in ancient Greece.)

When an individual goes into debt bondage he often takes with him is family and descendents.   When a ruler or government goes into debt bondage it appears they take their citizens with them.

As a lender not only might you lose all or part of the purchasing power you have transferred to another you could also become a slave master and can a slave master be true to him/her self?

There are a lot of other governments with huge debts the means for repayment of which is not clear.  I fear  debt bondage is not just a historical phenomenon.

Crises, referendums and impossible questions

Leaders don’t always speak for the people they claim to represent.  Therefore the Greek referendum may be a good idea.

The question is can the financial crisis which is threatening a number of countries around the world be resolved.  One doesn’t want to be defeatist but if we really are using resources at 150 per cent of the sustainable rate, then there is bound to be some serious economic problems.  Is it realistic to think we can beat the odds?

If we can’t beat the odds, should we then be looking at an orderly wind down in the hope we can minimize the human suffering?

Some times there are no answers.

Why we can’t let banks fail

One of the concerns with the Greek (and Irish and Spanish and Portuguese and the rest of Europe) debt crisis is that a number of banks will have to take a loss. It is tempting to say “so what, banks are rich and their shareholders can cope with a loss better than anyone else.

But there are some complications. Banks are essential in creating the money supply. When banks make a loan they create money and the total money supply is increased.. When the loan is repaid, the money supply decreases until the money is re-loaned and the supply goes back up.

Thus the money supply is constant – until a central bank purchases government bonds. This is the creation of new money but because of fractional reserve requirements (banks are required to hold a percentage of deposits in reserve against withdrawals) money created by the central bank is called high powered money and the money supply goes up with a multiplier effect.

All this is explained in any textbook on the economics of money and banking. What I have never seen explained is the effect on the money supply when a bank writes off a loan. Probably it has the reverse effect of high powered money – a decreased money supply subject to the same multiplier.

In most cases the writing off of loans will have little effect on the money supply However, if the amounts to be written off are large as was the case with the American housing crisis or is likely to be the case with any sovereign debt write off , the impact on the money supply will be substantial and it we lead to an abrupt decline economic activity.

Banks and their shareholders my be rich, but if they suffer loses on their loans, a lot others will become much poorer and out of jobs.

(Here is a link to the wikipedia article on money creation)

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